Company Law: Analysis of PNGair, Aussair, and Employee Rights

This report delves into a company law scenario, focusing on the actions of Aussair and PNGair regarding employee salary reductions and redundancy. It examines the legal status of both companies, the implications of the directors' decisions under the Corporations Act 2001, and the concept of lifting the corporate veil, particularly in cases of fraud and sham corporations. The report analyzes the options available to the employees, including claims for wrongful dismissal and breach of contract, and assesses their likelihood of success. The core issues involve the unilateral reduction of salaries, the formation of PNGair, and the subsequent employment of former Aussair employees under potentially unfair terms. The report highlights the importance of adhering to employment laws, proper consultation with employees, and the fiduciary duties of directors.

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Company Law
Student’s Name
Student’s Number

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Contents
Abstract............................................................................................................................................3
Introduction......................................................................................................................................3
The nature of a company.................................................................................................................4
Director’s decision to reduce salaries of employees........................................................................5
The formation of PNGair and its Legal Status................................................................................6
Lifting the veil of incorporation...................................................................................................7
Fraud.........................................................................................................................................7
A sham......................................................................................................................................7
The options available to the employees and their likelihood of success.........................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

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Abstract
The management of every company is guided by the company's constitution which
outlines powers exercisable by the directors, embodies the policies and rules for internal
management as well as the relationship that exist between shareholders and the directors of the
said company.1 in the absence of the constitution of a company (though very rare), the default
constitution is the replaceable rules contained in the Corporations Act 2001 (CA).
Directors are fiduciaries of a company. There are duties that are imposed on them both
under a statute and common law. They are required to act in the best interest of the company at
all times and should have the stakeholders in mind while making any decision that is likely to
affect them. A company has been regarded in the eyes of the law for a long time as a separate
legal entity with the capacity to contract in its name, sue and be sued and to own property. The
directors, however, act as the driving soul and mind of the company and aid in decision-making.
At times, the corporate veil is likely to be ignored where a company is a sham or is committing
certain crimes. Directors are supposed to act at all times in good faith and the interest of the
shareholders of a company. They should avoid conflict of interest.
Introduction
The facts of this scenario relate to the principles of corporation law and more specifically
to corporate governance.2 In advising the employee associations on the appropriate action to
take, this paper shall first examine the actions of the directors in trying to impose a 25% pay cut
agreement which the employees rejected and its implications under the corporation's act. The
formation of PNGair and its purpose shall also be examined.
1 Hadden, Tom. "The regulation of corporate groups in Australia" UNSWLJ 15 (1992): 61
2 Anderson, Helen. "Piercing the veil on corporate groups in Australia: the case for reform" Melbourne UL
Rev. 33 (2009): 333.

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The paper shall further discuss the redundancy decision on pilots and senior managers of
Aussieair and their subsequent employment at PNGair at the rate that Aussieair had sought to
impose. The options available to the employees will then be examined and a determination
whether they can enforce the salaries that they were entitled to initially at Aussieair. The paper
shall conclude by restating the position of the employees and the likelihood of succeeding in the
action. The legal status of PNGair and Aussieair shall also be restated and whether the directors
breached the provisions stipulated under the Corporations Act 2001.
The nature of a company
A company is a legal entity regarded in the eyes of the law as an artificial person with
liabilities and rights. The shareholders own the company and are regarded as the real owners of
the company.3 The company directors are the ones with the power to control and manage the
business of the company. Under section 124 of the Corporations Act, a company has powers of
an individual and a legal capacity.4
are viewed as separate legal identities. It can be sued or sue on its behalf, can own
property, it has separate liabilities, and certain companies have limited liability. Where
Companies have limited liability, it is either by guarantee or shares. A corporation has perpetual
succession; the death of a shareholder does not affect its existence and continuity of carrying out
its business.5 A company as a separate legal entity was outlined in the famous case of Salomon v
Salomon & Co Ltd (1897). Mr. Salomon who had been a sole trade operating a boot business in
the 1890s in London. He sold the boot business to the company to Salomon & Co Ltd for a sum
3 Anderson, Helen. "Piercing the veil on corporate groups in Australia: the case for reform" Melbourne UL
Rev. 33 (2009): 333.
4 Corporations Act, 2001
5 Paterson, William Everard, and Howard Heywood Ednie Australian Company law (Butterworths, 1992)

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amounting to 39 thousand Euros. The company paid Salomon by issuing shares worth twenty
thousand euros; it also issued debentures worth ten thousand euros and the balance paid in the
form of cash to Mr. Salomon. The company struggled in the business leading to numerous
unpaid debts. Mr. Salomon, however, paid himself the money that the company owed him ahead
of all the other creditors. The issue was whether the company was separate and independent or
whether the said company had been a sham meant to defeat creditors. It was held that the
company and any other company is separate from its members or managers; it is a separate legal
entity.6
A company is flexible. It is capable of conducting any form of business from time to
time. A company has a great capacity and scope of raising capital. It raises capital from members
through the issuance of a prospectus which invites persons desirous of investing to subscribe for
shares in the company. The shareholders have a right and say over the management of
companies. They have the right to vote on certain issues except for management decisions.7
Director’s decision to reduce salaries of employees
The action of directors to reduce by 25% the salaries of senior managers and pilots first
was contrary to the employment laws. A decision touching on the wages and salaries cannot be
decided unilaterally in a meeting of the board of directors without consulting the representatives
of the said employees. The employees were therefore right in refusing the pay cut because the
decision was arrived at illegally without following the relevant laws and the applicable labor
practices that should be incorporated and employed in such situations.
6 Ford, Harold Arthur John, and Robert P. Austin Principles of company law (Butterworths, 2004)
7 Tomasic, Roman, Stephen Bottomley, and Rob McQueen Corporations law in Australia. (Federation Press,
2002)

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Employees are the driving force in any company. Organizations which motivate their
employees through the provision of fringe benefits and other allowances have greater
performance since the employees become motivated and give their all in the performance of their
duties. Deciding in a boardroom to reduce their salaries was against their rights and has the right
to claim for reinstatement of their initial and former salaries and benefits. The manner in which
the employees were made redundant was un procedural and could sustain a claim for wrongful
dismissal even if they were paid all their terminal dues by the company.8 The payment of the
redundancy entitlements notwithstanding, the employees could still maintain an action for
wrongful dismissal based on the refusal to take a pay cut which was in the first place contrary to
employment and labor laws. A company is guided by rules and procedures to avoid disputes and
give certainty. Section 140(1) of the corporation's act creates the statutory contract between the
company and shareholders, the company and directors and the company and its employees.
Breach of such contract is a breach of the statutory provisions of the corporation's act. The rules
of the company can only be changed according to the provisions contained under section 136 of
the Corporations Act 2001.
The formation of PNGair and its Legal Status
After the refusal by the employees to take a pay cut, the board of directors of Aussair
decided to form another company in Papua Guinea. The management of the company was still
directly controlled by directors of Aussair. The question to ask is whether PNGair was formed as
a subsidiary of Aussair or as a totally different company separate from Aussair. A subsidiary
company is that company which has a voting stock which is greater than 50% which is under the
8 McQueen, Rob. A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920.
(Routledge, 2016)

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control and direction of another company which is usually known as a parent or a holding
company. Subsidiary companies are partially or wholly owned by the parent company, which
enjoys a controlling interest in the said subsidiary company.9
In the case of Peate v Federal Commissioner of Taxation (1964) 111 CLR 443, it was
sufficiently stated that a company is a new legal entity which is considered in the eyes of the law
as a person. The affairs of a company at times and strictly in certain circumstances, a court can
investigate and enquire into the management of the company operations and affairs.This is called
the indoor management rule. The rule is to the effect that outsiders are not required to enquire
into the affairs and the regularity of a company’s internal proceedings. The proceedings in this
case of Aussair can be said to be the decision to reduce the salaries of senior managers and pilots
and the subsequent formation of another company, PNGair. The rule was stated in the famous
case of Royal British Bank v Turquand. The rule, however, has exceptions: first, the exception
is to the effect that the rule shall only be used by the company directors if outsiders who deal
with the company irregularly had the actual knowledge of the irregularity.
Lifting the veil of incorporation
This principle of company law refers to the exception that is imposed by the court on the
principle of the separate legal entity. Piercing the incorporation veil is therefore where courts
disregard the separate nature of corporations and can hold a shareholder or a director responsible
for all actions of the corporation as if it was the shareholder. Courts pierce the veil of
incorporation where a request has been brought before it by the company itself or by
9 Kaye, Bruce N. "Codes of ethics in Australian business corporations." Journal of Business Ethics 11, no. 11
(1992): 857-862.

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shareholders in the company so that a remedy that could be open to them could be afforded or
enforced, to create a right that is enforceable or in other words lessen a penalty.10
The veil of incorporation can be lifted in the following grounds:
Fraud
Fraud occurs where directors who act as the controlling mind of a company use the fact it
is separate from its members or directors to avoid a fiduciary or a legal duty. In Re Edelsten ex
parte Donnelly (1992), a trustee in bankruptcy had brought an action claiming that some
property that was owned by the VIP group of companies was obtained by Edelstein before the
discharge of bankruptcy. The trustee stated that the corporations had been incorporated to evade
a legal obligation and to perpetrate a fraud.
A sham
The corporate veil can also be lifted where it is believed that the company was formed
under suspicious circumstances and is, therefore, a sham or façade. The company was formed or
used as a mask in hiding the real reason and purpose of the controller of the company. In Re Neo
(1997), Immigration Review Tribunal had been asked to conduct a review of the decision to deny
the application for a visa in a case where a company had organized a sponsorship, and the said
company had been formed on the day that such application was lodged. The company was not in
any form of business at the time. The tribunal held that the said company was just machinery
employed in circumventing Australian migration law.11 The company was a façade, its purpose
being the act of allowing the applicants to remain in the country.
10 Ramsay, Ian M., and David B. Noakes "Piercing the Corporate Veil in Australia’ (2001)." Company and
Securities Law Journal 19: 250.
11 Ford, Harold Arthur John, Robert P. Austin, and Ian M. Ramsay Ford's Principles of Corporations Law Vol 6
(Butterworths, 1995)

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Therefore, in consideration as to the manner in which PNGair was formed and the
intended purpose, it can only be concluded that it was a sham that was formed to hide and
perpetrate the mistreatment of employees of Aussair and not for a proper purpose. The company,
therefore, cannot be classified as a subsidiary of Aussair but a sham formed to conceal the fraud
by Aussair.
The options available to the employees and their likelihood of success
The senior managers and pilots that formerly worked for Aussair before being made
redundant have several options to advance their claims. First, the decision to reduce their salaries
and allowances by 25% was not only illegal but also contrary to best labor practices that require
consultation with employees or their representatives.12 In the absence of such laid down
procedures as well section 140 of the Corporations Act, the directors of the company acted ultra
vires and therefore their decision including declaring the employees who refused to take a pay
cut redundant null and void the payment of the redundancy entitlements notwithstanding.
Secondly, the employee representatives can advance the argument that PNGair Company
formed in Papua Guinea was a sham that Aussair was intending to use in effecting the salary
reductions that had been their main agenda. One should ask the question why they offered to
employ the employees they had made redundant in Aussair in the new company.13 It is best to
conclude that PNGair was neither a subsidiary nor a separate legal entity in the eyes of the law
but an extension of Aussair and therefore the employees were entitled to their former and initial
salaries.
12 Farrar, John Hynes. Corporate Governance in Australia and New Zealand (Oxford University Press, USA,
2001)
13 Kaye, Bruce N. "Codes of ethics in Australian business corporations." Journal of Business Ethics 11, no. 11
(1992): 857-862.

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Conclusion
A company is a separate legal entity which has the directors as the controlling mind of
the company. The management of a company is delegated to directors who are required to act in
the best interest of the shareholders. Directors are required by statute to follow the constitution of
the company in making management decisions and in the absence of such constitution; they are
guided by the replaceable rules in the Corporations Act.
The actions of the directors in declaring senior managers redundant and consequently
offering to employ them is a sham company formed for the sole purpose of implementing the
reduced salaries is in itself very illegal. PNGair is neither a company in the eyes of the law nor a
subsidiary of Aussair. Therefore, the employees that PNGair purported to employ and pay
salaries set by Aussair in null and void. The employee representatives, therefore, have a higher
chance of succeeding in court to reinstate the salaries that Aussair used to pay and not the 25%
reduction that the directors of Aussair had sought to implement. PNGair is not a different
company or a subsidiary of Aussair but a sham intended to be used in perpetrating an illegality.

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References
Corporations Act, 2001 (CA)
Hanrahan, Pamela F., Ian Ramsay, and Geoffrey P. Stapledon "Commercial applications of
company law" (2013)
Ford, Harold Arthur John, Robert P. Austin, and Ian M. Ramsay Ford's Principles of
Corporations Law Vol 6 (Butterworths, 1995)
Paterson, William Everard, and Howard Heywood Ednie Australian Company law
(Butterworths, 1992)
Farrar, John Hynes. Corporate Governance in Australia and New Zealand (Oxford University
Press, USA, 2001)
Ford, Harold Arthur John, and Robert P. Austin Principles of company law (Butterworths, 2004)
McKinnon, Jill L., and Lian Dalimunthe "Voluntary disclosure of segment information by
Australian diversified companies." Accounting & Finance 33, no. 1 (1993): 33-50.
McQueen, Rob. A Social History of Company Law: Great Britain and the Australian Colonies
1854–1920. (Routledge, 2016)
Tomasic, Roman, Stephen Bottomley, and Rob McQueen Corporations law in Australia.
(Federation Press, 2002)
Kaye, Bruce N. "Codes of ethics in Australian business corporations." Journal of Business
Ethics 11, no. 11 (1992): 857-862.
Bottomley, Stephen. "Taking Corporations Seriously: Some Considerations for Corporate
Regulation." Fed. L. Rev. 19 (1990): 203.
Shailer, Gregory EP. Introduction to Corporate Governance in Australia (Pearson Education
Australia, 2004)

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Stapledon, Geof P., and G. P. Stapledon Institutional shareholders and corporate governance
(Oxford University Press, 1997)
Farrar, John. Corporate governance: Theories, principles, and practice. (Oxford University
Press, 2008)
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny. "Investor
protection and corporate governance" Journal of financial economics 58, no. 1 (2000): 3-
27.
Ramsay, Ian M., and David B. Noakes "Piercing the Corporate Veil in Australia’
(2001)." Company and Securities Law Journal 19: 250.
Anderson, Helen. "Piercing the veil on corporate groups in Australia: the case for
reform" Melbourne UL Rev. 33 (2009): 333.
Hadden, Tom. "The regulation of corporate groups in Australia" UNSWLJ 15 (1992): 61